Does Autins Group (LON:AUTG) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Autins Group plc (LON:AUTG) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Autins Group

What Is Autins Group's Net Debt?

The image below, which you can click on for greater detail, shows that Autins Group had debt of UK£4.54m at the end of September 2020, a reduction from UK£4.94m over a year. However, it does have UK£2.97m in cash offsetting this, leading to net debt of about UK£1.56m.

How Healthy Is Autins Group's Balance Sheet?

We can see from the most recent balance sheet that Autins Group had liabilities of UK£5.10m falling due within a year, and liabilities of UK£9.01m due beyond that. On the other hand, it had cash of UK£2.97m and UK£4.34m worth of receivables due within a year. So its liabilities total UK£6.79m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of UK£7.72m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Autins Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Autins Group had a loss before interest and tax, and actually shrunk its revenue by 20%, to UK£22m. We would much prefer see growth.

Caveat Emptor

Not only did Autins Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable UK£836k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of UK£1.7m into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Autins Group is showing 2 warning signs in our investment analysis , and 1 of those is significant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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